• Industry leaders warn Spain’s draft Royal Decree is technically impossible
• Advisers tell NPM of a chilling effect on market activity
• Market players cite Portugal as a potential alternative destination for investors

Spain’s renewable production surplus has helped its data centre industry blossom into one of Europe’s fastest growing. A raft of strict regulations proposed late last month has, however, turned down the temperature on the country’s previously red-hot data centre market, at least temporarily.

The Spanish government’s proposed Royal Decree would require Spanish data centres to source 80% of their power from new renewables, despite Spain having a strong existing renewables infrastructure compared to its European neighbours.

The government has proposed that this requirement would be calculated on an hourly basis, until renewables account for more than 90% of the country’s electricity mix.

By then, developers, advisers and campaigners in Spain’s data centre sector fear that investment could have already shifted to competing European markets if the decree is approved in its current form.

“If you look at all conditions altogether, they’re literally impossible to comply with for most of the projects,” said Alejandro Fuster Tozer, Secretary General of the Spanish Data Center Association (Spain DC).

Joaquín Echánove, Spanish M&A specialist at international law firm DLA Piper adds: “If this royal decree is finally approved with this final wording, honestly most likely we would not recommend to our clients to invest in this sector.”

Last week, Merlin Properties, a Spanish real estate investment trust which operates across five facilities, was removed from the Cartera Versátil model portfolio of Renta 4 amid regulatory uncertainty over its data centre pipeline in Spain.

Yesterday, it was reported in the local press that Spanish renewable developer Ignis has postponed its IPO due to regulatory uncertainty in the sector.

Spain DC has previously said that it believe that EUR 9bn in investments is at immediate risk after three major international hyperscale companies communicated that they will freeze or redirect their projects.

José María Barrios, head of the regulatory practice at DLA Piper’s Spanish branch, confirmed that he has observed a cooling effect on investment activity in his client work since the draft Royal Decree was presented this summer.

“I would say that right now everybody is expecting or awaiting how this royal decree is going to end up. Of course, there are probably a lot of investors putting on hold investment decisions until the new royal decree is finally approved, and the definitive wording is known,” he added.

Under the laws, data centres of above 1 MW would need to achieve Category A under the European data centre labelling system, which is due to come into force in August 2027.

Until that date, the plans include strict PUE (Power Usage Effectiveness) and WUE (Water Usage Effectiveness) targets. The present plans dictate that PUE cannot exceed 1.15, meaning that for every 100 MW of power consumed, the data centre cannot use more than 115 MW in total.

The plans also state that the WUE cannot exceed 0.1, a very strict value that targets cooling systems directly.

Spanish data centre infrastructure developer Alto Infrastructure exclusively told NPM that their plans to continue scaling in Andalusian would have to be cancelled if the Royal Decree is approved in its current form.

Raquel Figueruelo, its Director Marketing & ESG, explained: “If you want to have very, very low PUE, you need to have a higher WUE. And if you want to have a very, very, very low WUE, you need to use more energy, more cooling and then you will have more power usage, you will have more PUE.”

In recent times, the significant renewable buildout in Spain has contributed to the flat prices which have afflicted domestic power markets over recent years.

The proposals are illogical in terms of these ongoing difficulties with renewable power pricing, Figeuruelo argues. “We don’t need to produce more. What we really need is to distribute better. The efficiency is not on our side, it’s on the side of the government, which is the owner of the distribution.”

Over 600 objections were mounted in challenges to the proposed legislation after the consultation period closed earlier this September.

Among these aggrieved parties are tech companies, regional governments keen to promote investment from these companies and energy firms who are set to miss out if continual data centre scaling does indeed become unviable in the country, as its critics have stated.

DLA Piper’s Echánove said: “We know that some of our foreign clients were already considering Portugal as an alternative… this could accelerate or make more intensive the interest in Portugal.”

For many Spanish data centre players, the perceived technical difficulties of the proposal has fuelled market-wide scepticism as to whether the plans will be approved in their current form.

“It remains to be seen whether the Royal Decree will move forward in its current form. Greater certainty around the final framework will be key to restoring confidence,” Echánove added.

The Royal Decree was originally scheduled for approval in October, but analysts have suggested that this may be delayed because of the government’s responsibility to respond to each of the objections individually.

As lawmakers mull these critiques, Spain DC’s Tozer said he is optimistic that the government won’t implement the laws in their current form: “I have to be”.